With-profits commission chase

I have about £250,000 to invest, from which I want to generate an income along with low risk. Would you recommend distribution bonds, with profits bonds or straightforward guaranteed bond with a fixed term.

My adviser keeps pushing with profits, but I have read they do this because of the high commission levels.Gary L, Derby

Andrew Merricks, Head of Investments, Skerritt Consultants, says: I can not believe that so called 'advisers' are still advocating with profits bonds for any purpose, let alone income provision. I suspect that the commission of up to 7% payable upon the entire investment (i.e. £17,500) may indeed be something to do with the recommendation.

Add to this the fact that most investment bonds lock you in with early exit penalties, variously dressed up as establishment charges, discontinuance fees etc etc, to protect the initial commission that was payed and you begin to see why these products are probably better for the adviser's income rather than the client's.

I use what I call the water tank income method and I would commend it to Gary and others seeking an income in this difficult era of low interest rates and relatively low inflation. Even with recent interest rate rises we are still encountering difficulties for those seeking a meaningful income, particularly with the volatility experienced in recent weeks within the corporate bond, gilt and property markets.

Through the 'water tank' the investor uses many different asset classes including cash to generate a total return rather than a specific income yield. One of the biggest mistakes that people make is target a certain level of income that they require (say 7%) and then look for something paying that level. This leads to over investment and over dependence upon only a limited range of assets.

The trick is to use diversification and - the greatest of all investment allies - time, to generate the chosen returns. So, using Gary's £250,000 as an example, if he is looking for £17,500 p.a. from this (7% p.a.) we would use a wrap product and immediately set aside at least two years' worth of income into the cash fund (£35,000). This not only earns interest in its own right but becomes the source of the regular income payments without fear of fluctuation.

Having 'booked' your income in this way, the remaining £215,000 can be set to work replenishing the pot through a combination of income and capital growth from the widest choice of assets. Thus the pressure is removed from the entire lump sum to earn 7% from Day 1, and has given the investment time to achieve the required return through a diversified mix of investment that would otherwise have been impossible through the traditional investment bond or cash route. At all times the total investment is accessible without penalty.

This can be just as effective for one off lump sums such as inheritance or property sale proceeds, as well as care home fees or pension matters such as income drawdown.